FX Update: Risk appetite rolls over

Trump lauded the equity market performance since the 2016 election just as the market was surging to a new high near opening hours yesterday, likely linked to hopes from the weekend that the US and China are ready to hammer out deal terms in the coming weeks. Alas, the price action quickly turned around and the US session closed on a sour note yesterday with further selling overnight.

The busy President Trump’s complaint about the price of oil yesterday, meanwhile, seemed to inspire a deep sell-of in energy markets, but we suspect that these were soft for a correction anyway, with prior complaints about the price of oil from the Tweeter in Chief not showing any consistent impact on the market. In currencies, the general reaction was along the lines one would expect, with oil-sensitive currencies, especially CAD, weak on the session and the rally in JPY crosses tamed once again, just as breaks of resistance were unfolding. Trend trading in this market has largely been a lost cause in recent history.

The most independent mover among major currencies was sterling, which rallied again and is now challenging the long-established lower range in EURGBP after Labour leader Jeremy Corbyn yesterday voiced support for a second Brexit referendum if the right terms for Brexit can’t be achieved and Prime Minister May was out talking up an article 50 delay to avoid parliament taking more control over the process tomorrow with an amendment to avoid a No Deal exit at the March 29 deadline.

The chief focus for the day will be on Fed Chairman Powell, where the bar looks very high for dovish surprises, given how far the market has swung in its expectations for the Fed. In fact, given the heavy criticism Powell has faced, he may take a rather defensive posture to push back against the idea that the Fed will always wax dovish as long as markets push them sufficiently hard into doing so.

Trading interest

Tactical interest for trading USDCAD spot on the long side if the price action stays above 1.3150. 
Previously, we have discussed AUDUSD shorts, and we need a sell-off bar or two to take the price action back well below 0.7100 for encouragement that downside remains the side of least resistance.
For downside potential in JPY crosses, we would look for a weak close in EURJPY today below about 125.50 for establishing short positions with stops above the 126.30 high.

Chart: USDCAD

USDCAD executed a fairly sharp comeback from the very weak closing bar from Friday, a fairly strong sign of support. The bulls will likely receive further fuel for a rally if risk appetite finally rolls over again and the oil market pokes around for new support. A firmer sign for a test-of-top scenario would be a solid rally bar that takes us back to the 1.3375 resistance.